Sequestration explained; the problem and the solution.

Sequestration explained; the problem and the solution.  Barack Obama, John Boehner, Congress, Senate and the American People.  

Part I:

  The most pressing issue of the day is “Sequestration,” a series of automatic budget cuts taking effect that reduce federal discretionary arbitrarily by $85 billion.  The annual federal deficit is approaching 1 trillion dollars per year and our federal debt is now slightly greater than our GDP.  While America is still solvent, and stimulus spending can help in a down economy, it is not sustainable indefinitely without other severe economic consequences including a drag on future growth and/or inflation, at least as our current financial system currently operates.   The fact “Sequestration” went into affect today, shows the broken nature of our political system and risks upsetting a fragile national and global economy along with the lively hoods of millions of Americans and good people world wide, exposing our nation to severe threats at a time we can ill afford such vulnerabilities.   The American Government, the American people, the United State governments, municipalities and county governments, along with its complex array of organizations, companies, corporations and other component parts of America’s social fabrics need to view “Sequestration” as a call for real and significant changes in the way we fund our Government, provide the services and products that account for our constitutionally defined general welfare, hereby defined as sufficiently nutritious daily caloric intake, access to affordable health services, heated housing and clothing along with provisions to provide for the security of persons and property from both domestic and foreign threats.  

     The 6 trillion in debt accumulated under President Barack Obama is irresponsibly high, but with high unemployment, slow economic growth and two Wars under way at the time of his election there were limited options as steep budget cuts would have by definition resulted in an economic depression- or retraction in terms of GDP and economic growth- exasperating the suffering of millions of Americans dependent on the government for basic sustenance.   The 85 billion in arbitrary cuts are not tactically studied for overall economic impact, with DoD spending employing higher percentage of highly trained scientists and engineers, as well as Veterans than the overall economy, and will cause disproportionate economic suffering in areas where the local economy is centered around the military such as San Diego County where 1 in 4 residents are employed in some way by the Department of Defense either directly, or by a company contracted by them. In official congressional hearings, California Representative “Buck” McKean explains, “defense cuts are certainly a path to job loss, especially among our high-skilled workforces. There is no private sector alternative to compensate for the Government’s investment. Secretary of Defense Panetta has said the cuts on the scale of sequestration will result in a 1-percent hike to unemployment and 1.5 million jobs lost.”

   As we saw with the first part of the recession, as corporations shed jobs to protect profit margins, mortgage default rates mirrored unemployment rates crimpling our lending system and putting the major banks at risk of eminent collapse.   Thus far the Government has tried to patch the problems by working within the markets, strategically taking federal treasury funds and moving them to the places believed to be best for the economy at large.  When the major banks received treasury funds it was understood and expected that they would continue lending out money at the 10:1 ratios they legally are permitted under law, and investment banks would continue leveraging at the 30:1 ratios that became commonplace prior to the collapse, the 700 billion stimulus dollars would have easily created 7 trillion in purchasing power for the companies, families, individuals and other borrowers benefiting from the money offsetting the risk of depression and encouraging significant economic growth.  By keeping borrowing rates at historic lows the increased debt liabilities should have remained well below the rates of return by responsible borrowers investing that money in their businesses and other profit driven expenses.  Unfortunately the banks were reluctant to use the money as advised, preferring increases in credit rates in an effort to call in loans as part of the credit crunch and pay back treasury debts rapidly to avoid unspecified strings and ease public discomfort with the big numbers attached to the bailout, whereas increased low rate lending and refinancing along with loan modifications and principal write downs would have better served the public and overall health of the economy.   The federal reserve then instituted a policy of quantitative easing in which new money minted by the fed is used to buy up treasury bonds and mortgage backed securities.  While this has worked at bringing down borrowing rates and keeping the federal government afloat without prompting inflation while propping up the housing markets and supporting small business, their has been a lack of legislation to support quantitative easing spending in an optimal manner.  Legislatures have opted for costly extensions of unemployment benefits and paid for massive increases in food stamps as opposed to investing in public works programs or effective paid job retraining programs.  The banks and big corporations have been generally apathetic and at times outright obstructive towards the interests of the common good and guidance of the executive, preferring insulator tactics of payroll reductions and outsourcing over coordinated and more centrally planned job and median income growth strategies allowing for massive holes in our economic ecosystem as traditionally stable lower middle class unskilled labor positions and other sizeable sectors of manufacturing were outsourced to low cost labor overseas, particularly in China.   The high unemployment brought an influx of new labor supply, allowing opportunistic business owners to garner concessions in contract negotiations, offer lower wages and fewer benefits as short term decision making blinded their ability to see the detrimental long term effects of high unemployment including but not limited to increased crime rates, sweeping social upheaval- as seen by the occupy and tea party movements- wide scale protests and increased ethnic and racial tensions.  

    Wealthy Americans and business owners, benefiting from their ability to access cheap credit and lower labor costs thrived, changing the make-up of the GOP with more radical anti-government libertarian elements, while the recession and budgetary limitations stalled more progressive and liberal hopes.  A Democratic controlled Senate and Presidency fought to overcome irreconcilable differences with an increasingly obstinate and insubordinate Republican controlled congress composed of a high number of Tea Party members who had signed no tax increase pledges and were ideologically very different than the Bush Era GOP.  Previously unspoken norms such as borrowing limit increases suddenly became bargaining chips and heated political negotiations ended with short term fixes deferring problems to future debate, stirring market anxieties and affecting the bond ratings of the United States of America.   As a populist President, Barack Obama sought to increase taxes on the most wealthy while Republicans sought to cut spending, reduce tax write-offs traditionally utilized by the middle class and reduce corporate taxes as a means of freeing up capital and encouraging economic growth, locking us in a impasse where deficit spending has become the politically convenient norm. Excessive deficit spending, excessive regulation, government monopolies and excessive welfare and deficit spending have historically slowed future economic growth, as was the case under FDR in 1937 as debts from the New Deal became due, and under Bush Sr. as debts from Reagan Era Cold War spending became due. Ultimately, in the case of the Barack Obama Administration, the real issue isn’t spending, at least by his administration, rather it has been a lack of sufficient revenues.  The recession and higher unemployment meant lower tax receipts as corporations, companies and individuals re-organized to take advantage of tax loopholes and incentives.  While the 6 trillion dollars in federal debt accumulated since Barack Obama took office is too high, the low rates at which the money was borrowed from the federal reserve mean that the interest paid from the treasury each year on that debt is only around 76 billion or around 5% of our GDP, enough to cause a drag on future government driven growth (albeit, the bond holders may very well use the 76 billion dollars in a way that grows the economy faster than government spending would have), but reasonable considering that federal spending increased at the lowest rates in nearly half a decade and needed to continue spending to prop up the economy in down swing.  Revenues are too low because unemployment rates and trade deficits are too high.  The “Sequestration” cuts draconian as they are make room in the budget to begin paying back these debts.

         Market place dynamics as originally explained by Adam Smith in “Wealth of Nations,” supply-demand explanations of human behavior are all important elements of healthy economics.   However, profit motives negatively affect the way in which specific components of general welfare are supplied, adversely affecting the individual interests paying for the service or product.  In health, a privatized healthcare system creates a financial motive to keep individuals slightly sick and addicted and costs associated with health high.  According to the Government, Abuse of prescription medicines is unbelievably high with seven million Americans using psychotherapeutic drugs non-medically (www.drugabuse.gov) with residual costs increasing as side affects developed from prescription abuse add additional costs with unintentional overdose deaths by usage of opiates exceeding those of heroine and cocaine.  Unhealthy and addicted citizens become unproductive and unprofitable workers, reducing our economic viability and industrial capacity as a nation.   Unfortunately, millions of American are going without the basic medicines and treatments that can potentially save their lives or improve their health as cost barriers or other deterrents discourage treatment, while others exhaust financial resources reserved for medical expanses by utilizing unnecessary medicines and treatments.

       The federal reserve can print all the money it wants and buy up treasury bonds and mortgage backed securities as quick as the currency can be cut from the press, but if legislative laws and institutional practices persist to unfairly limit access to low rate credit and capital investment to specific groups than those groups’ growing edge in terms of financial resources will give them unfair competitive advantages that continue to aggravate disparities of wealth and increase class related tensions.  Those that are already wealthy and have good credit, will pay less for their money as the poor already paid lest regardless of work ethic or talent, pay usury rates for money borrowed just to get to the work sight, pay for ongoing education and basic groceries or expenses. 

         Crony Capitalism, kick backs, future job offers and outright corruption within the granting of DoD contracts, as exemplified by the no bid contracts awarded to Haliburton, a company former run by Vice President Cheney, but rampant in areas of health, energy and security across party lines in the congress and senate showcase the cost to tax payers of the network of arms and private security forces operating as mercenaries for major corporations in the energy and defense fields proliferate massive financial incentives to promote military conflict and military spending with lengthy histories of supplying weapons to the very enemies we currently buy their products to defend us from as exemplified by the Lockheed martin and Raytheon designed naval and air capacity of Iran.   

        Market competition and healthy economics, innovation, entrepreneurship and free-enterprise have long been crucial components of the America way, but national security and the general welfare of the populace is the priority, treason and obstruction have pushed the greatest country this world has ever known uncomfortably close to the edge, and a change must come.  Budget cuts will further hurt the economy in the short term, tax increases will risk slowing private sector economic growth and hiring leaving new revenues as the only viable option available.  By creating a national energy company, a nationalized bank, a nationalized health insurance program and nationalizing our largest weapons manufactures while allowing them to compete against non-governmental entities coordinated more tightly and subordinated to the executive, we can generate sufficient revenues to close our federal deficits, create jobs and improve our ability to protect our citizens and allies while providing superior health care and financial well-being but all of this depends on a cooperative legislature.  The executive can use the bully pulpit and executive powers to pressure the legislature, but there are constitutional limits to what Barack Obama can do, Sequestration is going to shake up the hornets nest over the next year and if the Republican continue to stand in the way risk being swept from control of the Congress with an invigorated democratically controlled congress, senate and executive ready to push America forward.  

    Part II:  In achieving a balanced budget America needs to embrace a model of dual federalism where federal, state and local government are reserved control of reasonable revenues.   For control of oil reserves on federal lands and other energies, the fed should create a federal company but should higher labor from the states where work is being done when sufficient professionals can be trained or provided by the state.  The proceeds of federal drilling should go back into the federal infrastructure bank to save up for a future overhaul of our energy grid, investment in clean energy projects, maintenance of roads and subsidies for clean tech cars and solar panels.  Managing a federal hospital system is inefficient so the federal role in healthcare should be reserved to Medicaid, Medicare and a new optional for purchase federal health insurance comparable to those already provided to federal workers with a brief note that the VA hospitals are federal managed to a large extent.  States, as seen in their hospitals attached to universities should be expanded and can provide phenomenal health care in addition to state government revenues.    The provision of providing affordable single payer health insurance options should be the goal of these programs, only possible with aggressive legislation halting the inflation of health care costs.  National security is legal grounds for the government to do a lot and in light of the struggles major weapons firms have had in filling their federal contracts, particularly with F-35, the federal government is fully within its legal authority to assume control of Lockheed-Martin and any other weapons companies.  Doing so, America can increase sales to allied nations in Europe, Israel, Japan and South Korea to boost treasury revenues. 

      In the short-term, Congress and Senate should immediately pass legislation to offset 10 billion dollars of sequestration effecting the global war on terror operations, nuclear weapons proliferation, minority and small business programs, office of civil rights, office of economic research, operation and maintenance marine corps, office of federal student aid, employment and training administration, the corps of engineers and the national endowments for the Arts and humanities.

        

     Additionally I would emphasize the need for serious coordination between the nation’s largest corporations and banks, along with the CEOs and the department of commerce to provide for government guaranteed loans to expand domestic job roles and invest in financial growth by the sale of US services and products abroad, with sweeping executive authorities and pressures to ensure 100% by in by any CEOs or companies called to serve Patriotic duties and the common good. 

Commissioned By Phillip Reilly